Tag Archives: Forex

NFA Interpretive Notices on Advertising Practices – Applicable to NFA Forex Members

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Earlier we discussed a release by the NFA in which they expressed the desire to apply the NFA Compliance Rule 2-29 to current NFA Members who are involved in the off-exchange forex markets (see NFA Proposes Rule 2-29 Apply to Forex Members).  We believe that the CFTC will approve the NFA’s request and thus certain aspects of Compliance Rule 2-29 will apply to NFA Members who trade forex.  We also believe that once the forex registration provisions are promulgated by the CFTC, this compliance rule will also apply to those forex managers.  In anticipation of such developments, we’ve summarized below (and linked to) the major interpretive notices that the NFA has released on Compliance Rule 2-29. Continue reading →

NFA Continues to Pursue Forex Regulation for Current Forex Dealer Members

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Two new releases indicate that the NFA is serious about regulating the off-exchange foreign currency markets

On our sister website, www.forexlawblog.com, we have detailed the continued regulatory actions by the NFA with regard to the current regulation of the off-exchange forex markets.  The two notices, described in further detail below, apply to Forex Dealer Member and their interactions with their clients. While the CFTC has been slow to promulgate rules regarding the expected new Forex regulations, the NFA has acted swiftly and addressed many important issues.  However, forex managers should still get ready for coming forex regulations – a collegue of mine has recently discussed forex registration with a CFTC compliance person and that person expects that proposed rules will be promulgated within the first quarter of next year.  As always, stay tuned as we will continue to stay on top of this issue.

A summary of the two NFA actions is included below.  Continue reading →

Forex Hedge Funds – Forex Commodity Pools

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This is a guide for those managers who want to start a forex hedge fund.  It provides information on forex hedge fund structures, an overview of the registration requirements, and a discussion of the process of forming a forex hedge fund.  For the purpose of this article we are focusing on spot forex transactions, but much of this information also applies to those managers who trade foreign currency futures and forwards contracts. Continue reading →

NFA Releases More Information on Forex Registration

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(www.hedgefundlawblog.com in conjunction with www.forexregistration.com)

The NFA released more information on the Forex registration requirements for Forex CPOs, Forex CTAs and Forex IBs (release is here).  The NFA specifically notes that the CFTC has not yet completed writing the registration requirements so there is not date set for registration.

With regard to the registration process, individuals will need to submit a Form 7-R throught the NFA’s Online Registration System and will need to have passed both the Series 3 exam and the new Series 34 exam which will be one hour wand will consist exclusively of forex-related questions.  The NFA has also released some of the exam topics which can be found here and which we have also republished as Forex Exam Topics.  The registrations will also need to submit fingerprint cards to the NFA which will be processed by the FBI.  Continue reading →

What is Forex? Information on Retail Off Exchange Foreign Currency Transactions

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(www.hedgefundlawblog.com in conjunction with www.forexregistration.com)

Forex Overview

Forex or FX or retail off-exchange foreign currency transactions all refer to the same thing – trading foreign currencies for gain, usually in the spot market.  The Forex markets have grown tremendously over the last few years and both individual investors and money managers are trading foreign currencies to make money.  Unfortunately, many fraudsters have used the lure of the Forex markets to perpetuate scams and for some Forex has a negative connotation. Continue reading →

Discussion of New Forex Registration Requirements

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Forex hedge funds have escaped registration requirements so far, but that is expected to change very shortly. Yesterday the NFA released a report which provided some detail on the proposed new Forex registration requirements.  While the NFA notes that the CFTC has not yet published its proposed forex rules, the NFA is still getting prepared for the Forex registrations.  The NFA specifically stated that managers of forex account (including hedge fund managers) will need to register with the CFTC and be a member of the NFA.  From the report:

The legislation also requires firms that solicit retail forex customers, manage retail forex accounts or operate pools for retail customers to register with the CFTC and be Members of NFA. FCMs, IBs, CPOs and CTAs whose activities involve retail forex will be designated Forex FCMs, Forex IBs, Forex CPOs and Forex CTAs, while APs of those firms will be designated as Forex Associated Persons.

New Series 34 Exam

The NFA also announced that there will be a new exam which forex managers will need to pass in order to be a Forex CPO and a Forex AP.  According to the release, the NFA’s Vice President of Registration Greg Prusik said “We have developed a new proficiency examination specific to retail forex activity, called the Series 34 exam, and have recommended to the CFTC that its forex rules require any individual applying for registration as a Forex AP to take and pass both the Series 3 exam and the Series 34.”

For information on the likely Series 34 exam topics, please see Series 34 exam topics.

Other HFLB articles:

** Please note that this release is different from the NFA release of last week (see NFA Begins Regulating Forex above).  The release from last week alerted managers who are already registered with the CFTC as CPOs or CTAs that, if they also provide advice to clients regarding off-exchange forex, they will need provide such clients with a disclosure document.   Previously the registered CPOs and CTAs did not need provide clients with a disclosure document if the trading program focused only on spot forex.

NFA Increases Required Capital for Forex Dealers

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Yesterday the NFA announced that Forex Dealer Members, those brokers who engage in Forex transactions with retail customers, will need to have a minimum net capital of $10 million by October 31, 2008.  This doubles the current minimum net capital of $5 million.

The NFA has been very aggressively moving to regulate the retail forex market.  Congress has helped through passing the Farm Bill, but separately from the Farm Bill, the NFA, in conjunction with the CFTC, has been moving towards regulating not only the managers of Forex hedge funds, but also the Forex dealers.

Earlier this year the NFA changed the minimum net capital for Forex Dealers from $1 million to the current $5 million; there are two more hikes scheduled to be implemented in the first half of next year.  While this will undoubtedly serve to protect investors, it also cast a huge burden on current and future Forex Dealer Members.  The NFA notice is posted below and can be found here.

Notice I-08-27
October 24, 2008

Net Capital Requirements for Forex Dealer Members

On October 22, 2008, the Commodity Futures Trading Commission approved increases to NFA’s capital requirements for Forex Dealer Members (FDMs). As stated in a July 23, 2008 Notice to Members, the minimum requirement will be $10 million as of October 31, 2008, $15 million as of January 17, 2009, and $20 million as of May 16, 2009.

Questions concerning these requirements should be directed to Sharon Pendleton, Director, Compliance ([email protected] or 312-781-1401) or Valerie Kretschmer, Manager, Compliance ([email protected] or 312-781-1290).

Other relate HFLB articles:

NFA to Begin Regulating FOREX

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The last unregulated space within the hedge fund industry was the retail foreign exchange (“Forex”) market.  As of November 30 of this year, many hedge fund managers which invest in the spot forex markets will need to be registered with the NFA.  More analysis on this to follow.

The press release and the new NFA rules follow below.

Notice I-08-26

October 16, 2008

Effective Date of NFA Compliance Rules 2-41 and 2-42: Disclosure by Forex Pool Operators and Trading Advisors

NFA has received notice that the Commodity Futures Trading Commission has approved NFA Compliance Rules 2-41 and 2-42. The new rules will become effective on November 30, 2008. Accordingly, after November 30th Members that manage forex accounts on behalf of customers or offer pools trading forex must provide prospective clients and pool participants with a disclosure document that has been filed with NFA prior to use. The new rules only apply if the forex pool or the person for whom the forex account is being managed is not an eligible contract participant as defined in Section 1a(12) of the Commodity Exchange Act. A forex pool, however, may not claim to be an eligible contract participant by virtue of Section 1a(12)(A)(v)(II) or (III) of the Commodity Exchange Act.

The disclosure document must provide disclosures similar to those currently required under CFTC Part 4 regulations. Finally, a Member operating a pool subject to the new rules must provide periodic (monthly or quarterly) account statements and an annual report to the pool participants.

Copies of the new rules are attached for your convenience. Additionally, NFA’s February 29, 2008, submission letter to the CFTC contains a more detailed explanation of the changes. You can access an electronic copy of the submission letter at http://www.nfa.futures.org/news/newsRuleSubLetter.asp?ArticleID=2101.

Questions concerning these changes should be directed to Mary McHenry, Senior Manager, Compliance ([email protected] or 312-781-1420) or Susan Koprowski, Manager, Compliance ([email protected] or 312-781-1288).

COMPLIANCE RULES

* * *

Part 2 – RULES GOVERNING THE BUSINESS CONDUCT OF MEMBERS REGISTERED WITH THE COMMISSION

* * *

RULE 2-41. FOREX POOL OPERATORS AND TRADING ADVISORS

(a) Pool Operators. Except for Members who meet the criteria in Bylaw 306(b) and Associates acting on their behalf, any Member or Associate operating or soliciting funds, securities, or property for a pooled investment vehicle that is not an eligible contract participant as defined in Section 1a(12) of the Act must comply with this section (a) if it enters into or intends to enter into any transaction described in NFA Bylaw 1507(b)(1) except as described in NFA Bylaw 1507(b)(3). For purposes of this section, a pooled investment vehicle may not claim to be an eligible contract participant by virtue of Section 1(a)(12)(A)(v)(II) or (III) of the Act.

(1) For each such pooled investment vehicle, the Member or Associate must prepare a Disclosure Document and must file it with NFA at least 21 days before soliciting the first potential pool participant that is not an eligible contract participant.

(2) The Member or Associate must deliver the Disclosure Document to a prospective pool participant who is not an eligible contract participant no later than the time it delivers the subscription agreement for the pool. Any information delivered before the Disclosure Document must be consistent with the information in the Disclosure Document.

(3) The Disclosure Document must comply with the requirements in CFTC Regulations 4.24, 4.25, and 4.26 as if operating a pool trading on-exchange futures contracts. The term “commodity interest” in those regulations should be read to include forex transactions, and the Risk Disclosure Statement required by CFTC Regulation 4.24(b)(1) must be replaced by the following if the pool does not trade on-exchange contracts and must be added as a separate statement if the pool trades both on-exchange contracts and forex.

RISK DISCLOSURE STATEMENT

YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A POOLED INVESTMENT VEHICLE. IN SO DOING, YOU SHOULD BE AWARE THAT THIS POOL ENTERS INTO TRANSACTIONS THAT ARE NOT TRADED ON AN EXCHANGE, AND THE FUNDS THE POOL INVESTS IN THOSE TRANSACTIONS MAY NOT RECEIVE THE SAME PROTECTIONS AS FUNDS USED TO MARGIN OR GUARANTEE EXCHANGE-TRADED FUTURES AND OPTIONS CONTRACTS. IF THE COUNTERPARTY BECOMES INSOLVENT AND THE POOL HAS A CLAIM FOR AMOUNTS DEPOSITED OR PROFITS EARNED ON TRANSACTIONS WITH THE COUNTERPARTY, THE POOL’S CLAIM MAY NOT RECEIVE A PRIORITY. WITHOUT A PRIORITY, THE POOL IS A GENERAL CREDITOR AND ITS CLAIM WILL BE PAID, ALONG WITH THE CLAIMS OF OTHER GENERAL CREDITORS, FROM ANY MONIES STILL AVAILABLE AFTER PRIORITY CLAIMS ARE PAID. EVEN POOL FUNDS THAT THE COUNTERPARTY KEEPS SEPARATE FROM ITS OWN OPERATING FUNDS MAY NOT BE SAFE FROM THE CLAIMS OF OTHER GENERAL AND PRIORITY CREDITORS.

FOREX TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL.

INVESTMENTS IN THE POOL MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, ADVISORY, AND BROKERAGE FEES, AND THE POOL MAY NEED TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETING OR EXHAUSTING ITS ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE (SEE PAGE [insert page number]) AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT (SEE PAGE [insert page number]).

THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE YOU SHOULD CAREFULLY REVIEW THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT (SEE PAGE [insert page number]).

NATIONAL FUTURES ASSOCIATION HAS NEITHER PASSED UPON THE MERITS OF PARTICIPATING IN THIS POOL NOR THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.

(b) Trading Advisors. Except for Members who meet the criteria in Bylaw 306(b) and Associates acting on their behalf, any Member or Associate managing, directing or guiding, or soliciting to manage, direct, or guide, accounts or trading on behalf of a client that is not an eligible contract participant as defined in Section 1a(12) of the Act by means of a systematic program must comply with this section (b) if it intends to manage, direct, or guide the client’s account or trade in transactions described in NFA Bylaw 1507(b).

(1) The Member or Associate must prepare a Disclosure Document and must file it with NFA at least 21 days before soliciting the first potential client that is not an eligible contract participant.

(2) The Member or Associate must deliver the Disclosure Document to a prospective client who is not an eligible contract participant no later than the time it delivers the agreement to manage, direct, or guide the client’s account or trading. Any information delivered before the Disclosure Document must be consistent with the information in the Disclosure Document.

(3) The Disclosure Document must comply with the requirements in CFTC Regulations 4.34, 4.35, and 4.36 as if managing, directing, or guiding accounts or trading in on-exchange futures contracts. The term “commodity interest” in those regulations should be read to include forex transactions, and the Risk Disclosure Statement required by CFTC Regulation 4.34(b)(1) must be replaced by the following if the managed, directed, or guided account or trading will not include transactions in on-exchange contracts and must be added as a separate statement if it will include transactions in both on-exchange contracts and forex.

RISK DISCLOSURE STATEMENT

THE RISK OF LOSS IN FOREX TRADING CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. IN CONSIDERING WHETHER TO TRADE OR TO AUTHORIZE SOMEONE ELSE TO TRADE FOR YOU, YOU SHOULD ALSO BE AWARE OF THE FOLLOWING:

FOREX TRANSACTIONS ARE NOT TRADED ON AN EXCHANGE, AND THOSE FUNDS DEPOSITED WITH THE COUNTERPARTY FOR FOREX TRANSACTIONS MAY NOT RECEIVE THE SAME PROTECTIONS AS FUNDS USED TO MARGIN OR GUARANTEE EXCHANGE-TRADED FUTURES AND OPTIONS CONTRACTS. IF THE COUNTERPARTY BECOMES INSOLVENT AND YOU HAVE A CLAIM FOR AMOUNTS DEPOSITED OR PROFITS EARNED ON TRANSACTIONS WITH THE COUNTERPARTY, YOUR CLAIM MAY NOT RECEIVE A PRIORITY. WITHOUT A PRIORITY, YOU ARE A GENERAL CREDITOR AND YOUR CLAIM WILL BE PAID, ALONG WITH THE CLAIMS OF OTHER GENERAL CREDITORS, FROM ANY MONIES STILL AVAILABLE AFTER PRIORITY CLAIMS ARE PAID. EVEN CUSTOMER FUNDS THAT THE COUNTERPARTY KEEPS SEPARATE FROM ITS OWN OPERATING FUNDS MAY NOT BE SAFE FROM THE CLAIMS OF OTHER GENERAL AND PRIORITY CREDITORS.

THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN FOREX TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS.

MANAGED ACCOUNTS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES AND THE ACCOUNT MAY NEED TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETING OR EXHAUSTING ITS ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH FEE TO BE CHARGED TO YOUR ACCOUNT BY THE ACCOUNT MANAGER. (SEE PAGE [insert page number]).

THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND SIGNIFICANT ASPECTS OF THE FOREX MARKETS. THEREFORE, YOU SHOULD CAREFULLY REVIEW THIS DISCLOSURE DOCUMENT BEFORE YOU TRADE, INCLUDING THE DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT (SEE PAGE [insert page number]).

NATIONAL FUTURES ASSOCIATION HAS NEITHER PASSED UPON THE MERITS OF PARTICIPATING IN THIS TRADING PROGRAM NOR THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.

RULE 2-42. FOREX POOL REPORTING

(a) Except for Members who meet the criteria in Bylaw 306(b), any Member operating a pool that trades forex must comply with the requirements in CFTC Regulation 4.22 in the same manner as would be applicable to the operation of a pool trading on-exchange futures contracts. The term “commodity interest” in that regulation should be read to include forex transactions.

(b) A Member may file with NFA a request for an extension of time in which to file the annual report in the same form as provided for in CFTC Regulation 4.22(f).

SEC files complaint against forex fraud

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Summary:

Last Wednesday the SEC filed a complaint against a forex hedge fund manager who was supposedly using a “trading robot” to generate huge returns. It turns out the forex hedge fund manager and the trading robot did not generate the outsized returns, but instead lost investor money. There are two very important items to note here:

1. It is scams like this that has the SEC and CFTC on the offensive to regulate the spot forex market.

2. Again, it is so important for all investors to do proper due diligence on managers and to make sure they know what they are investing in. These fraudsters give a bad name to all hedge fund managers and, sometimes, they can be stopped if the right questions are asked in the beginning.

SEC Release:

U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20688 / August 22, 2008

Securities and Exchange Commission v. Royal Forex Management, LLC and Patrick H. Haxton, (U.S.D.C., Northern District of Texas, Dallas Division, Civil Action No. 3:08-CV-1467-L)

SEC Accuses Carrolton, Texas, Man of Selling Fraudulent Securities Involving Foreign Currency Trading

On August 20, 2008, the Securities and Exchange Commission filed an action in Dallas federal court to halt an alleged unregistered and fraudulent offering of securities by Patrick H. Haxton of Carrollton, Texas, and his company Royal Forex Management, LLC (“Royal”). The securities were investment contracts involving the trading of foreign currencies on the Forex market. On August 21, 2008, United States District Judge Sam A. Lindsay entered a temporary restraining order suspending the offering and orders freezing the defendants’ assets, requiring sworn accountings, prohibiting any alteration or destruction of documents and expediting discovery. The court set a hearing for September 4, 2008 to consider the Commission’s application for preliminary injunctive relief.

The defendants named in the Commission’s Complaint are: Patrick H. Haxton, age 51, of Carrollton, Texas, the owner and sole manager of Royal; and Royal Forex Management, LLC, a Texas limited liability corporation operated out of Haxton’s Carrollton home.

The Commission’s Complaint alleges that from at least June 2007 to the present Haxton, personally and through Royal, raised at least $305,000 from 8 investors in three states. Haxton offers the Forex investments through the Royal web site (www.royalforexmanagement.com), advertising on his work truck and personal contacts. Royal’s promotional materials and Haxton’s oral statements are replete with representations of phenomenal past trading returns, including claims of 400% to 500% annual returns, generated by a complex software program named “The Currency Trading Robot” (“Trading Robot”), purportedly created by Haxton. On the web site, Haxton claims to have a great history and to have been a very successful trader since 2000. Haxton and the web site also represent that there is very little risk of loss.

The Commission alleges, however, that these representations are materially false and misleading. For instance, the Commission contends that Haxton and Royal never generated the claimed phenomenal returns by trading currency. Indeed, according to the Complaint, Haxton lost a significant portion of investor funds trading foreign currencies and misappropriated the remaining funds for his own personal use. In some instances, investor funds were never traded, but were used to pay business and personal expenses.

The defendants are charged with securities fraud under Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and with conducting an unregistered offering under Section 5 of the Securities Act. The Complaint also seeks permanent injunctions, civil penalties and disgorgement of ill-gotten gains, among other relief, against each defendant.

The Commission would like to thank and acknowledge the assistance of the Texas State Securities Board in this matter.

CFTC Announces Formation of Retail Foreign Currency Fraud Enforcement Task Force

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Washington, DC— The Commodity Futures Trading Commission (CFTC) has formed a special task force charged with investigating and litigating fraud in the off-exchange retail foreign currency (forex) market.

The creation of the task force within the Division of Enforcement comes in the wake of Congress’ passage in June 2008 of “The Food, Conservation, and Energy Act of 2008” that clarified and strengthened the CFTC’s jurisdiction over this market. The task force will focus on fraud in the retail forex market and will work cooperatively with other federal and state regulatory and criminal authorities.

“The formation of the CFTC’s new Forex Enforcement Task Force reaffirms our agency’s commitment to stopping unscrupulous individuals working in this space. Not only do forex fraudsters prey upon unsuspecting citizens, but their illegal activities taint the reputations of those working honestly in the futures industry,” said CFTC Commissioner Michael Dunn, head of the agency’s Forex Education and Outreach Task Force. “This announcement sends a clear signal that the CFTC is on the beat, and that our continued and increased cooperation with law enforcement authorities will help put these forex dealers where they belong – in jail.”

“Forex fraud impacts investors of all stripes,” CFTC Acting Director of Enforcement Stephen J. Obie said. “With the creation of the retail forex task force, the CFTC has committed the resources necessary to expand its efforts to identify and prosecute those who commit fraud in the retail forex market.”

Since enactment of the Commodity Futures Modernization Act in 2000, the CFTC has filed nearly 100 enforcement actions against firms and individuals selling illegal forex futures and option contracts. To date, the CFTC has obtained judgments in these enforcement actions for civil monetary penalties of approximately $560 million and restitution of investor losses totaling $450 million.